Understanding Cash-Balance Plans

Some facts about cash-balance pension plans:

* The first cash-balance plan was introduced by Bank of America in 1985, but large numbers of employers began embracing the idea only in the late 1990s, in a search for cost savings. About 19% of the largest 1,000 U.S. companies had such plans in 1999, before a moratorium halted conversions of traditional pension plans to cash-balance plans.

A report this year by consultant Watson Wyatt Worldwide found 33 of the largest 100 firms have instituted cash-balance plans or similar types of plans.

* Employers typically contribute to workers’ cash-balance accounts based on a percentage of workers’ annual income -- often 5% of pay. In that sense, the plans resemble 401(k) retirement accounts. But workers aren’t able to contribute and have no control over how the money is invested.

Companies build in an assumed annual percentage rate of return on the accounts that is the same for all workers, regardless of their age.

* Company adoptions of cash-balance plans have been at a virtual standstill since 1999, after protests by workers at some companies led the Internal Revenue Service to halt approval of new plans and led some members of Congress to call for reform.

Dozens of workers have sued their employers over the plans, claiming conversions from traditional pension plans reduce benefits of older workers and thus are discriminatory.

Although companies were free to go ahead with conversions even without the government’s OK, most have waited, worried that they would be open to charges of discrimination.

New rules proposed last week by the Bush administration, if approved, would clarify the standards for such plans, putting limited burden on companies to prove their fairness and allowing more conversions.